Abstract This paper studies an economy in which firms can operate either a mature or a new technology and lenders acquire information on the productive assets of the borrowing firms that are eligible as collateral. We demonstrate that when contracts are imperfectly enforceable informed lenders offer inexpensive funding for the mature technology but may choose not to finance the new one, seeking to preserve the value of their information on the mature assets. Using firm-level data from Italy, we find that banks that establish long-term relationships with firms promote technological progress on average. However, we find that relationship banks inhibit innovations that entail a large depreciation of existing technology-specific information such as radical innovations.
Abstract This is the first paper systematically calculating, testing and explaining different definitions of the survivorship bias in fund performance. We document that the survival-performance-relation is stronger for small funds and we find significant under-performance of non-survivors but no significant out-performance of new funds. Survivorship bias is still a problem as well in other fields of research, e.g., in countries where survivorship bias-free data is not available and because certain methods require truncated data. This paper provides guidance on how to deal with and reduce survivorship bias in empirical studies.
Abstract This paper provides the first empirical test of the diversification of opinions theory and the group shift theory using real business data. Our data set covers management teams and single managers of US equity mutual funds. Our results reject the group shift theory and support the diversification of opinions theory: teams follow less extreme investment styles, their portfolios are less industry concentrated, and they are eventually less likely to achieve extreme performance outcomes. These results hold after taking into account the impact of fund and family characteristics as well as manager characteristics.
Abstract This paper studies the life-cycle consumption and portfolio choice problem taking account of annuity risk at retirement. The study allows for government-provided annuity income. Optimally, households allocate retirement wealth to nominal, inflation-linked and variable annuities, and condition this choice on the state of the economy. The case in which there are limitations in the types of annuities that are available is also considered and the costs of annuity market incompleteness are quantified. Subsequently, the paper determines how investors optimally anticipate annuitization before retirement. The conclusion is that ignoring annuity risk before and at retirement can be economically costly.
Abstract What determines the yields at which international investors are willing to lend to emerging market countries, and the amounts of such lending? We analyze the motivation underlying investors’ choices in allocating their holdings across countries, through regressions for both prices (bond yields) and quantities (bond market capitalization or stocks of external liabilities) estimated during two waves of financial globalization (1870–1913 and today). The results suggest that, throughout the past one and a half centuries, a combination of human capital (including informal human capital) and institutional quality has been a key determinant of emerging market countries’ ability to attract international investors.
Abstract Trusting behavior has been shown to affect households' portfolio choice between risky and risk-free financial assets. We extend the analysis to include the dominant component of households' portfolios, real estate. Using data from the European Social Survey, we estimate individual-level trust by applying a hierarchical item response model. Combining these estimates with data on Spanish households' financial decisions from the Survey of Household Finances, we show that households with less trust invest more in housing and less in financial assets, in particular risky ones. Trust thus may drive not only (limited) stock market participation but also financial development more generally.
Abstract This paper studies asymmetric profitability of the momentum trading strategy. When investors face Knightian uncertainty, they react differently to past winners and losers, which creates asymmetric patterns in price continuations. This asymmetry increases with the level of market and idiosyncratic uncertainty relating to the fundamental value of stocks. We provide a model explaining this phenomenon and empirical evidence supporting the hypothesis. Our results also imply that momentum is more likely to continue for downward trends in a highly uncertain market.
Abstract This article investigates the importance of both trust and sociability for stock market participation and for differences in stockholding across Europe. We estimate significant effects for the two, and find that sociability can partly balance the discouragement effect on stockholding induced by low regional prevailing trust. We test for exogeneity of trust and sociability indicators using variation in history of political institutions and in frequency of contacts with grandchildren, respectively. Moreover, the effect of trust is stronger in countries with limited participation and low average trust, offering an explanation for the remarkably low stockholding rates of the wealthy living therein.
Abstract We study the link between college interaction and portfolio choice. We consider both the general imprinting of values shared by all the students attending the same school—values-based interaction—and the ensuing interaction with the classmates—bonding-based interaction. We show that even after controlling for the standard motivations of portfolio theory, college-based interaction affects the choice of styles—growth/value investing as well as stock picking. Both dimensions of interaction—values-based and bonding-based interactions—contribute to shape the investor choice. Overall, college interaction significantly affects portfolio choice. Investors invest in the same stocks in which their former classmates do. Each individual college leaves a specific and distinct trace on his students.
Abstract We evaluate financial assets with payoffs linked to individual labor income, as conceived by Shiller (2003) and others. Using a realistically calibrated life-cycle model, we find that such assets can generate nontrivial welfare benefits, depending on the precise structure of the instrument. However, the assets we consider can only eliminate a relatively small fraction of the welfare costs of labor income risk over the life cycle. We highlight the fact that although the purpose of such assets is to smooth consumption across states of nature, one must also consider the assets' effects on households' ability to smooth consumption over time.